Digital, delivery drive results at Yum China

by Erica Shaffer
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Cashless payments and food delivery will provide robust growth in the future. 
 

SHANGHAI – For Yum China Holdings Inc., 80 million people can’t be wrong — that’s the number of customers engaged with the company’s loyalty programs for KFC and Pizza Hut Casual Dining and they represent a key driver of the company’s future growth.

Micky Pant, CEO of Yum China, described 2016 as a groundbreaking year for the company in digital and delivery. “Total delivery sales of our company were around $700 million and we have the largest presence online as a restaurant operator,” he told analysts during an earnings call on Feb. 7. “Cashless payment accounted for about 30 percent of total company sales and our loyalty program has over 80 million members between KFC and Pizza Hut, ranked number one in the restaurant industry worldwide.” Delivery represented about 10 percent of company sales for 2016, the company said.

For the fourth quarter ended Dec. 31, 2016, Yum China reported net income of $88 million, or $0.23 per diluted share, compared with a loss of $29 million, or $0.08 per diluted share reported in the year-ago quarter.

Revenues for the most recent quarter were $1,978 million, compared with $2,048 million reported in 2015. Yum China’s fiscal fourth quarter includes September, October, November and December results.

For the full year, total system sales grew 5 percent, including growth of 6 percent at KFC and three percent at Pizza Hut, excluding foreign currency translation. Same-store sales for the full year were flat with an increase of 3 percent at KFC, which was offset by a 7 percent decline at Pizza Hut.

Total restaurant margin climbed 2.7 percentage points to 15.3 percent, helped by the impact of retail tax structure reform implemented on May 1, 2016. Reported operating profit grew 31 percent, primarily aided by the impact of retail tax structure reform. Foreign currency translation negatively impacted operating profit by $36 million. Operating profit for the full year grew 37 percent, excluding foreign exchange and special items.

Going forward, Yum China plans to adopt leading digital technologies that will support the company’s delivery and payment platforms including location-based services, mobile payments and third-party delivery services. Pant said “…we believe our digital and delivery capability is number one amongst restaurant operators in China. We see digital and delivery as the robust new growth engine to drive restaurant industry going forward and we believe we’re very well positioned to benefit from this secular growth trend.”

KFC is king

KFC is leading Yum China’s charge into digital technology and delivery services. Marketing events are organized around what Pant called “digitally significant dates,” such as Single’s Day on Nov. 11. He credited Joey Wat, who recently was appointed COO of Yum China, with guiding digital innovation in the KFC unit. Johnson Huang was appointed general manager of the company’s KFC business, reporting to Wat.

“Under the leadership of Joey, KFC has made excellent progress in this area and fully embraced the new digital era,” Pant said. “KFC is an early mover on adopting cashless payment across China. Mobile payment accounted for about a third of the company sales in December 2016 and has continued to grow rapidly.

“Mobile payment not only speeds up transactions, it provides convenience for customers and it improves labor efficiency,” Pant continued. “Most important, it captures the customer journey in the digital world.”

Wat, who previously served as CEO of Yum China’s KFC business, described a two-pronged digital strategy focused on the customer’s digital journey and customer relationship management (CRM).

“So the digital journey, we have already started, we just need to continue and further improve the customer experience. …before you come to the store, you can open up your Baidu Map and whatever the most nearby store, we can do customized advertisement or information with that store,” Wat said. “And then before you arrive at the store, you can use your mobile to order — pre-order and then pay and then you can pick-up the food or you can choose to eat in our restaurant. And then you can use the mobile payment…”

The second part of the digital strategy is the CRM strategy. KFC has 60 million members in its KFC database alone.

“So what is next? Of course, we want more customers, however, in 2017 and beyond, we also want to focus on quality,” she said. “How many times customers shop with us? So other than quantity, we want quality as well and I think that is a very natural and right migration of our focus. So that is the first question.”

In addition to technology, KFC also has benefited from the rapid growth of delivery. KFC is the number one online restaurant operator in terms of sales and the single largest delivery brand in China, according to the company.

“We have our own proprietary platform that interacts with customers directly and in addition, we also collaborate with all major third-party aggregators to drive orders,” he explained. “Importantly, KFC delivers all orders and a dedicated KFC rider interacts with customers directly. And we own the customer database.”

Same-store sales were flat at KFC, the company reported, after a 1 percent gain was offset by a 3 percent decline in same-store sales at Pizza Hut Casual Dining. Operating profit in the fourth quarter was $106 million, compared to $68 million in the fourth quarter of 2015. Total revenues for the quarter were $1,371 million, compared with $1,430 million reported in the year-ago quarter.

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